June 2024

Summary of the June Meeting of the Emerging Issues Task Force

by Disha Buch, Andrew Winters, Brandon Coleman, and Curtis Weller, Deloitte & Touche LLP

This EITF Snapshot summarizes the June 14, 2024, meeting of the Emerging Issues Task Force (EITF or “Task Force”). In March 2024, the Financial Accounting Standards Board (FASB or “Board”) updated the EITF’s operating procedures. Under the new operating procedures, the initial Task Force recommendation is summarized by the FASB staff in an agenda decision memo for the Board’s discussion at a public meeting. On the basis of such discussion, the Board determines whether to add a project to the FASB’s technical agenda and votes on all substantive decisions (including a cost-benefit analysis). The Board then directs the staff to draft a proposed Accounting Standards Update (ASU) for a vote by written ballot. These decisions are expected to be made at a single meeting. After the FASB approves the draft proposed ASU, it is exposed for public comment. When the comment period ends, the FASB considers the comments received; redeliberates the issues at a public Board meeting; and, ultimately, issues a final ASU.

The official EITF minutes are posted to the Deloitte Accounting Research Tool (DART) and to the FASB’s Web site (note that the official EITF minutes may contain details that differ from those in this publication because they are not available as of the date of this publication). EITF meeting materials (released before the meeting and used to frame the discussion) are also available on those sites.

Issue 24-A, “Determining the Accounting Acquirer”

Status: Agenda decision reached. The EITF directed the FASB staff to draft an agenda decision memo for the Board’s consideration.

Affects: Business combination transactions involving a legal acquiree, or target company, that is a variable interest entity (VIE) in accordance with ASC 810-10.1

Background: In November 2023, Deloitte submitted an agenda request asking the FASB to consider adding a project to the EITF’s agenda to amend the existing guidance in ASC 805 and ASC 810 on “how the accounting acquirer in a business combination is determined when the legal acquiree is a [VIE].” At its April 22, 2024, meeting, the EITF Agenda Committee added this project to the EITF’s agenda (the FASB publicly announced the addition at its May 8, 2024, meeting). Under the EITF’s new operating procedures, Deloitte was identified as the lead EITF member and tasked with drafting the Issue Summary. The EITF deliberated this Issue at its June 14, 2024, meeting.

ASC 805-10-25-5 states that in a business combination in which a VIE is acquired, the primary beneficiary of the legal acquiree is always the accounting acquirer. For business combinations in which the acquired entity is determined not to be a VIE and it is not clear which of the combining entities is the acquirer after application of the voting interest entity model, a reporting entity is required to consider the factors in ASC 805-10-55-11 through 55-15 to determine which legal entity is the accounting acquirer. In practice, a reporting entity may reach different conclusions related to certain business combinations when the legal acquiree is a VIE than it does when the legal acquiree is a voting interest entity, particularly when the transaction is effected primarily by exchanging equity interests. That is, the primary beneficiary of the legal acquiree that is a VIE may not be identified as the accounting acquirer of the combining entities if the reporting entity considers the factors in ASC 805-10-55-11 through 55-15. In other words, if two business combinations are identical except for the fact that the legal acquiree is a VIE in one transaction and a voting interest entity in the other transaction, the accounting acquirer may be different solely on the basis of the nature (VIE or voting interest entity) of the legal acquiree. Some examples of such a scenario could include:

Umbrella partnership C corporation (Up-C) transactions in which a special-purpose acquisition company (SPAC) acquires an operating company that is a limited liability company (LLC) or partnership.
Use of Up-C transactions to facilitate a business combination in which the legal acquirer is a public corporation other than a SPAC.
Merger of two corporations when the legal acquiree is a VIE as a result of insufficient equity at risk.2

Under existing guidance, once the legal acquirer of a VIE is identified as the primary beneficiary and the accounting acquirer and the VIE meet the definition of a business, the combined entity’s financial statements are significantly affected. That is, the guidance on business combinations requires that all of the accounting acquiree’s identifiable assets and liabilities be remeasured in accordance with ASC 805-20 (generally at fair value) and that goodwill be recognized and initially measured in accordance with ASC 805-30. This is sometimes referred to as a “new basis of accounting.”

Summary: At its decision-making meeting on June 14, 2024, the EITF made the following decisions:

EITF members supported a narrow-scope project to address the practice issue (discussed above) recommended in the agenda request. While the EITF discussed potential challenges with applying the existing guidance on acquisitions of entities that are not a business, the Task Force ultimately concluded that addressing such challenges was beyond the scope of this project.
After discussing three alternatives presented in the Issue Summary, the Task Force supported making narrow amendments to ASC 805-10-25-53 to require the reporting entity to evaluate the factors in ASC 805-10-55-11 through 55-15 when a business combination involving a legal acquiree that is a VIE is effected primarily by exchanging equity interests. The Task Force voted 11 to 0 in support of the amendment since it was viewed as addressing the issue discussed above while having the narrowest impact on current practice.
The Task Force also unanimously supported a prospective transition method and early adoption.

Next Steps: The FASB staff will prepare an agenda decision memo for the Board to discuss at a public meeting that is expected to occur in July 2024. The agenda decision memo will include the materials addressed by the EITF, a summary of the EITF’s discussions, the basis for the EITF’s recommendation, and an analysis of the FASB’s agenda criteria. The Board will discuss the issue at a public meeting and determine whether to add a project to the FASB’s technical agenda.

Footnotes

For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

In accordance with ASC 810-10-15-14(a), the “total equity investment (equity investments in a legal entity are interests that are required to be reported as equity in that entity’s financial statements) at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders.”

ASC 805-10-25-5 states:

The guidance in the General Subsections of Subtopic 810-10 related to determining the existence of a controlling financial interest shall be used to identify the acquirer — the entity that obtains control of the acquiree. If a business combination has occurred but applying that guidance does not clearly indicate which of the combining entities is the acquirer, the factors in paragraphs 805-10-55-11 through 55-15 shall be considered in making that determination. However, in a business combination in which a variable interest entity (VIE) is acquired, the primary beneficiary of that entity always is the acquirer. The determination of which party, if any, is the primary beneficiary of a VIE shall be made in accordance with the guidance in the Variable Interest Entities Subsections of Subtopic 810-10, not by applying either the guidance in the General Subsections of that Subtopic, relating to a controlling financial interest, or in paragraphs 805-10-55-11 through 55-15.

The purpose of this publication is to briefly describe matters discussed at the most recent meeting of the Emerging Issues Task Force. This summary was prepared by Deloitte’s National Office. Although this summary of the discussions and conclusions reached is believed to be accurate, no representation can be made that it is complete or without error. Official meeting minutes are prepared by the Financial Accounting Standards Board staff and are available approximately three weeks after each meeting. The official meeting minutes sometimes contain additional information and comments; therefore, this meeting summary is not a substitute for reading the official minutes. In addition, tentative conclusions may be changed or modified at future meetings.

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